As far as the jobs market is concerned, we’ve rarely (if ever) had it so good. Yet the link between jobs and pay remains severed. This is unlikely to reunite until productivity improves. And with that, there are few quick fixes.
Rude health. The last time the British labour market was in such good shape Tammy Wynette was standing by her man. In the three months to June employment was up by 340,000y/y taking the employment rate to a record 75.1%. Unemployment was down by 160,000y/y and the rate fell to 4.4%, its lowest level since 1975. The number of job vacancies slipped a little but there have never been fewer people chasing each job since these records began in 2001. We’ve rarely had it so good.
Hard times. If the proverbial Martian visitor to Earth had inspected these job figures it would no doubt – having had a decent economics training – have proclaimed that wages must be rising sharply. It would have been wrong. Regular pay – which excludes bonuses – was up 2.1%y/y in the three months to June. While slightly higher than in recent months, wage growth at that pace pales alongside inflation running above 2.5%. The result is that real pay growth – a better measure of how our spending power is changing – fell by 0.5%y/y. The underlying reason is poor productivity.
Tough love The only good thing to say about the UK’s productivity performance between April and June (down 0.1%) is that it was worse between January and March (down 0.5%). Without wishing to be Jeremiah-ish, while full employment provides short term support for the economy, long term prosperity relies on productive advancement. Without it, the economic cake might continue to grow but individual slices may not. The data tell a hard truth. We produce no more per hour of work than in 2008 and only slightly more than we did in 2003. Perhaps stagnant real pay growth is not so unjustified.
Peak pain? Inflation remained steady at 2.6% in July, down from May’s high of 2.9%. Sterling’s fall had been the main cause of rising inflation. Yet most of the fall had happened by July 2016, so are we past the worst? There are signs that the upward pressure on producers’ costs is beginning to ease. Input prices for manufacturers rose by 6.5% in the year to July, down considerably on the 10% increase in June. None of this guarantees that inflation will fall back towards target, but it does reduce the chances of it getting above 3% and into MPC letter-writing territory.
No rush. Sterling’s fall has made headline inflation measures more difficult to interpret, as above target inflation doesn’t mean the economy is running too hot. Instead, monetary policy makers have to focus on other indicators of price pressures that better reflect the domestic economy. Step forward the services producer price index. It shows that services firms raised their prices by an average of just 0.8% in Q2, compared to a year earlier. That’s down from a peak of 1.6% in Q3 last year. With 80% of the economy producing so little inflation there’s no rush for the MPC to raise rates.
Further away. For renters, the good news first. Average rents are rising more slowly than average pay (they increased by 1.8% in July for the forth consecutive month). The bad news for would-be buyers is that house price rises again outpaced pay. The price of a typical property increased by 4.9%y/y in June, or by £11,000 in cash terms. The average property sold for £279,000 with a typical buyer’s income of £60,000. That’s double the income for a median working age household.
Cooling. Strong food sales helped drive a 0.3% rise in UK retail sales between June and July. But the longer-term picture is clear. Consumer spending is cooling. The 1.8% rise in retail sales in the three months to June compared to the same three months in 2016 was the lowest since 2013. In the final four months of 2016 – the now famous post-referendum consumer splurge – growth was just shy of 6%. But with pay falling in real terms, the sharp fall in growth rates shouldn’t be surprising.
Strengthening, widening. The eurozone’s expansion in Q2 was confirmed as 0.6% from Q1 – a very respectable rate. And good news abounds across the single-currency area. Exports and investment are helping France post its strongest continuous expansion in six years. The Netherlands and Austria are clocking up strong growth figures, too. Meanwhile Central and Eastern Europe is churning out some heady numbers with y/y rises of 3.9%, 4.5% and a bounding 5.9% in Poland, the Czech Republic and Romania, respectively.
Elusive. Despite the firm recovery, price pressures have remained pretty much elusive across the eurozone. A situation compounded by the strengthening of the euro in recent months (pushing down import costs). The minutes of the last ECB meeting reveal growing concern around the strong euro. It complicates discussions around tapering the Bank’s bond-buying programme. After all, why rein in stimulus if inflation is forecast to fall short of the central bank’s target?
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